Taking a new look at effective outsourcing

Perhaps no other area of corporate real estate has generated as much discussion since the early 1990s as "outsourcing," which is essentially the transfer of certain functions to an outside service provider. Despite the frothy advocacy of outsourcing, as if a new invention, it has a long and proven history.

Changes in the corporate environment have encouraged the re-examination of the scope of outsourcing. In recent years, management has been under enormous pressure to boost profits.

At the same time, there was a growing consensus that headquarter staffs were bloated and in need of being trimmed. As a result, non-profit centers, including corporate real estate departments, were identified for possible downsizing or elimination.

Many real estate brokerage firms seized upon this trend and developed broad marketing campaigns directed at senior corporate management, promoting the notion that the entire corporate real estate function would be better served if transferred to the service provider. Various corporations readily accepted this pitch and delegated all ongoing responsibility for their real estate activities. The logic seemed persuasive: Not only would the company reduce its full time work force, but it could also draw upon the expertise and geographical strengths of a service provider for what was viewed as an increasingly complicated and burdensome activity.

Meanwhile, other corporations, after reviewing their alternatives, opted to continue to manage their real estate matters internally, but with a changed focus. While the department may have been streamlined, there was a renewed recognition of the value of the internal corporate real estate professional. In addition to the requisite traditional skills, the "new" professional has database management expertise, financial sophistication and strategic planning capability. Instead of reacting to corporate directives, the real estate director has become more involved in the early stages of the decision-making process. As such, the corporate real estate professional uniquely understands the particular needs of his company .

The background and skills of the corporate real estate professional are decidedly different than the typical service provider, a brokerage firm. The corporate real estate professional's basic responsibility is too manage the occupancy needs of the company.

Should the company require a new facility, his or her objective is to determine what facility best meets the occupancy requirements for the particular business unit at the lowest possible cost. On occasion the best solution is internal, not requiring an outside transaction. Conversely, the brokerage firm is principally a commission-driven business.

Most of its brokers' compensation is directly proportional to completing transactions. The special strength of the brokerage company is marketing, which is hardly a key skill for the bulk of corporate real estate decisions.

In response to the changing landscape, some corporate real estate managers have attempted to become more like brokers, rather than emphasizing their own strengths. For example, they have initiated relationships with brokers whereby the corporation shares in the commissions. The corporate real estate department would become a profit center and would not be viewed as overhead. Notwithstanding the legal questions raised by this strategy, it had the effect of putting the real estate manager in the same ambiguous position as the broker.

Instead of a detached, objective role, the real estate manager now had a stake in the transaction.

The repackaging of the expanded outsourcing is often euphemistically called a "strategic alliance." The two parties are the service provider (in most cases a national brokerage firm) and a Fortune 500 company. Despite the intriguing buzzwords, it does not always deliver what it suggests to the corporation. The relationship is skewed in favor of the brokerage firm. In essence, the thrust of the corporation's real estate activities are in the hands of an outside firm. Often, the contact person in the corporation is not conversant with real estate matters, thereby placing greater reliance on the outside service provider. Locking itself into such a relationship can impede the corporation from pursuing other alternatives for outsourcing. There are indeed times when a national brokerage firm will best satisfy the needs of a particular assignment. Other projects, however, might be better handled by a consulting firm or a regional brokerage entity with specific expertise in a particular area.

Sometimes an assignment requires absolute confidentiality and might be best handled by a small firm. There are also instances when the company's internal staff can most effectively perform the assignment. In any event, the range and complexity of assignments argues against the exclusive engagement of any one service provider, regardless of the size of the firm. It is also in the interest of the corporation to induce the service provider to compete for its business on an ongoing basis. Such a policy discourages complacency by the service provider. Often, some of the most creative ideas are developed by having various firms compete for a particular assignment.

Lastly, despite assurances to the contrary, the large national brokerage firms are not unchanging monoliths but are in constant flux. Whenever a chief asset walks out of the door each night, uncertainty always exists. In the last few years, the brokerage industry has witnessed the decline or disappearance of various prominent firms. Consistency of the quality of service is not guaranteed.

In summary, the most effective outsourcing policy is one in which the service provider does not supplant the internal corporate real estate manager, and maximum flexibility is maintained in selecting service providers by avoidance of long-term agreements.

For the most effective outsourcing policy, the service provider

* does not supplant the internal corporate real estate manager and

* maintains maximum flexibility in selecting service providers by avoidance of long-term agreements.